Commentary on Economics, Information and Human Action

Enron and crony corporatism

Rob Bradley has an Econlib essay on Enron, and it’s a good one. He focuses on Enron’s particular form of crony corporatism, its ability to take advantage of regulatory complexity, and the lessons that we should carry forward from the experience:

Enron was essentially a political company, not a free-market one. Ken Lay’s creation would be unknown to history were it not for the distorted incentives from the government side of the mixed economy.

For classical liberals, Enron is a case study in support of the separation of government and business. There is egregious rent-seeking, whereby the company worked to shape political intervention for economic advantage. There is bootleggers and Baptist politicking, whereby Enron teamed with nonprofit groups to win support for what was in the company’s narrow self-interest.

There is the peril of half-slave, half-free. Partially deregulated markets (such as with electricity in California) created a devil’s sand box for profit-making that otherwise would have been absent in a free-market order.

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3 thoughts on “Enron and crony corporatism”

Isn’t that implicitly true of any company in any regulated industry? E.g., no matter how much one may eschew the regulatory inefficiencies, you can’t make $ in energy unless you can successfully navigate those inefficiencies. At some level, that means every company that is making $ in energy is “guilty” of crony capitalism, no? From regulated utilities to Enernoc to GE, everyone in the space who makes money would have substantial parts of their business destroyed if tomorrow we suddenly introduced fully competitive, transparent & free markets. Those parts of Enron that weren’t expressly violating the law (more parts than most appreciate) were simply more successful than their peers at navigating and monetizing those opportunities for regulatory arbitrage. But surely you’re not implying that they are more guilty simply because they were more (temporarily) successful in the course of optimizing within those constraints?

Enron produced little or nothing. Therefore, Enron’s participation in the energy markets was largely a zero sum game. Enron’s gain was someone else’s loss. Most of that gain was the result of legal activity. However, I would argue that much of it was the result of unethical activity.

Sean, I would distinguish between those who abide by the inefficient, distortionary existing regulations, those who work through transparent channels to change those regulations in ways that reduce deadweight loss and benefit consumers and themselves as a result, and those who lobby for and use the political process to implement changes to regulations that benefit themselves without necessarily reducing deadweight loss.

In my analysis, Enron fell into the third category. Which is a technical way of saying that I think Ed is right, and Enron’s cronyism was zero-sum at best, or more likely negative-sum.